Today's consumers are finding it increasingly difficult to save money for their future. Many consumers are facing rising current expenses, including mortgage or rental property payments, car loan payments, general living expenses, and in many cases school loan payments. These current expenses may even exceed the consumer's disposable income. Thus, a large percentage of a consumer's income is required to pay current expenses, leaving little or no room for allocations to future savings.
This lack of future savings is troublesome in light of the belief that to fund a retirement equivalent to a pre-retirement standard of living, a consumer needs to save 10 to 12 times the salary to support his standard of living. It is widely recognized that one of the easiest ways to save for the future is to save money, even a small amount, over a long period of time such as many years. This makes saving large amounts of money feasible, as the concept of the time value of money results in the savings multiplying in value over the years. For example, one time value of money proposition is that an investment will double in value every 10 years if it increases in value 7% per year, assuming the increases in value are reinvested. Yet, with huge portions of their income needed to pay off current expenses, many consumers are having great difficulty in saving even small amounts of money for their future.
Consequently, when consumers do have money to set aside for future savings, they are increasingly choosing investments with relatively high rates of return. This is especially true in the last few years, with a booming bull market for stocks and a corresponding explosion of investment options such as mutual funds, derivatives, and venture capital funds. The danger with high rate of return investments, however, is that they generally have an increase in the amount of risk. In other words, the consumer has a chance to make a high rate of return on the investment, but he also has an equal or greater chance of losing some or all of his investment.
Generally, most financial planners advise that these types of high risk investments should not comprise a majority of a consumer's investments for the future because of the possibility of losing everything. Yet, the recent and steady climb in the value of stocks has produced a robust image that many consumers are betting everything on. As a result, many consumers are taking money out of the safe shelter of financial institutions and placing their money in high risk investments. Thus, consumers stand a greater chance of losing the money they are setting aside for the future, and financial institutions are losing out on business as many of their best customers are withdrawing funds or just keeping minimum balances.
Along with the exodus of its best customers, financial institutions are faced with increased costs in marketing for new customers and in servicing the remaining customers. To a financial institution, a “best customer” is one who either has a very high balance or one who has very low cost, thus producing a high revenue per customer for the institution. Due to the increasing turnover in their customer base, many financial institutions are required to increase their marketing efforts to recruit new customers. These marketing efforts are expensive, and drain the professional and financial resources of the institution and reduce overall profitability. On the other hand, the customers left at the financial institutions are typically higher cost customers. The “cost” of a customer to a financial institution increases with the customer's use of the financial institution. So, for example, items that add cost include frequent use of a teller, lack of direct deposit of paychecks, calls to the help center, writing a lot of checks, etc. Thus, the attrition of high balance customers and low cost customers leaves financial institutions with higher cost, lower revenue customers, thereby reducing their profit margins.
Additionally, typical financial institutions do not efficiently leverage their existing capabilities to reduce their own costs and add value to their relationship with the consumer. Many financial institutions, particularly the larger ones, offer many different services to meet the needs of the consumer. Most institutions keep these services separate, however, resulting in isolation, duplication and consumer frustration. For example, a financial institution may have banking services, investment services, credit services, loan services and insurance services, among others. These services usually have their own, distinct relationship with a consumer, and often with outside businesses. Often these various services comprise their own divisions, groups or departments that fall under one institution, but that are not particularly integrated. As a result, the benefits of each service are not leveraged to the consumer's or the institution's full advantage. Thus, consumers and financial institutions are looking for solutions to the above-defined problems.